CNET también está disponible en español.

Ir a español

Don't show this again

Internet

Out-of-state shareholder suits upheld

Publicly traded companies in California are subject to securities lawsuits in state court by out-of-state shareholders, the California Supreme Court has ruled.

Publicly traded companies in California are subject to securities lawsuits in state court by out-of-state shareholders, the California Supreme Court has ruled.

The 5-2 ruling, handed down yesterday, is being closely studied by high-tech companies in the Golden State because their volatile stocks make them especially vulnerable to securities fraud suits. The number of shareholder lawsuits filed in state courts rose dramatically after Congress in 1995 made it harder to sue for securities fraud in federal court. Critics of the opinion say it will allow shareholders to circumvent congressional reforms.

The California Supreme Court's decision came in a case brought against Diamond Multimedia on behalf of people who purchased the company's stock between October 1995 and June 1996. During that period, Diamond's stock skyrocketed from 20 per share to more than 40. In November 1995, Diamond issued a new offering, which sold for 30. Following a June 20, 1996, announcement that Diamond would suffer a loss, the company's stock plummeted below 10. The class-action suit, filed in both state and federal courts on behalf of Diamond shareholders nationwide, alleged fraud.

The effect of the ruling is not yet clear. Lawyers estimate it will affect only a few dozen pending cases, due to federal legislation that Congress passed last fall requiring shareholders to bring almost all class-action securities lawsuits in federal--rather than state--court. But the ruling will not affect stock fraud cases brought by groups of 49 people or fewer, leaving out-of-state institutional investors free to bring actions in state court.

William Dato, the lead attorney for the plaintiffs at Milberg Weiss Bershad Hynes & Lerach, said that despite the Securities Litigation Uniform Standards Act Congress passed in November, the decision affects at least 25 cases his firm currently is handling. What's more, he said, large institutional investors outside California remain free to sue in the Golden State and appear to be interested in preserving that right.

"Its significant that there were a number of amicus briefs filed in support of the plaintiffs by large pension funds or state retirement systems," Dato said.

Amicus or "friend-of-the-court" briefs are filed by nonparty groups when they believe a case has important consequences. Among the friends of the court arguing for the plaintiffs in the Diamond case were state retirement agencies from Missouri and Pennsylvania as well as the National Council of Senior Citizens, the Teamsters, and Service Employees International unions.

Joseph Grundfest, a Stanford University professor who oversees the school's Securities Class-Action Clearinghouse, said Dato may be right.

"For a significant number of lawsuits, a very large percentage of the damages is collected by a relatively small number of claimants, which suggests there may be an opportunity," he said.

In the Diamond case, the defendant's attorneys argued that the state case should be dismissed because the plaintiffs resided outside of California, and the state statute they relied on prohibited alleged actions "in this state." A California superior court disagreed, and so did a majority of Supreme Court justices in yesterday's opinion.

The statute "simply provides a remedy for third parties whose sale or purchase of stock is affected by unlawful conduct in California, making the remedy available without any express territorial limitation," the majority opinion stated. The statute "does not, as defendants/petitioners suggest, provide that the acts constituting market manipulation must be done with the intent to induce the purchase or sale of stock in California by a third party."

In a dissenting opinion, two justices held that California's corporate securities law was never intended to have an extraterritorial reach. "Instead," the dissent argued, "it was drafted and enacted in the expectation that it would supplement the federal securities acts, statutes that apply to and regulate a truly nationwide securities market." The court's majority opinion, they went on to argue, would improperly interfere with recent changes Congress has made in federal securities laws.

Steve Schatz, an attorney for Diamond at Wilson Sonsini Goodrich & Rosati, agreed with the dissenters and said the company is considering whether to appeal the decision to the U.S. Supreme Court.

Nonetheless, he agreed that the reach of the decision would be limited by the Uniform Standards Act, which, he said, far overshadows yesterday's decision.

The case was a "contributing factor in mobilizing attention which led to enactment of the Uniform Securities Act," he said. "On one level we lost this battle, but I think we may have won the overall war by enactment of the Act."